A deed of trust is a security agreement which is secured by real estate, I.e., it’s a mortgage. The main difference between a trust deed and a regular mortgage are the parties involved and the specific regulations. With a mortgage for only two parties the borrower and the lender are involved. With a standard mortgages, there is a lengthy judicial process when it comes to foreclosures.
With trust deeds of trust, there are three parties involved, investor (beneficiary), trustee (trust deed broker) and trustor ( the individual borrower). Little, if any, court involvement is needed to foreclose on deeds of trust.
So how can this arrangement benefit you as an investor?
With deeds of trust a borrower (trustor) goes to a broker (trustee), the broker then funds the borrower’s loan with funds received from you, the investor (beneficiary). This arrangement benefits you in the following ways:
• Easy: Trust deeds allow you to appreciate the benefits of real-estate investment without the hassle of managing the property yourself.
• Variety: There are of course many types of real-estate and just as many types of trust deeds allowing you to invest in a diverse array of properties, from residential all the way to industrial.
• Flexibility: Every deed of trust deal is different. Unlike bank loans which are subject to rigid guidelines and bank bureaucracy, trust deeds are private arrangements made between an individual broker, borrower and you the investor.
• Predictable: Unlike other investments where returns are somewhat uncertain, with trust deeds the borrower is contractually obligated to make regular payments. As long as the loan remains outstanding you can expect to receive a return.
That is unless your borrower defaults.
Yes, trust deeds give you the right to foreclose if your borrower defaults, without court involvement. But what if the borrower files for bankruptcy? Well then the courts are involved, and you cannot foreclose as the borrower reorganizes their debts. As the borrower’s bankruptcy proceedings make their way through the court, your deed of trust is essentially a worthless piece of paper.
Even after the borrower’s bankruptcy closes and foreclosure goes through, foreclosed properties never really sell for their full market value, which equals a loss for you.
To mitigate the risk of default consider the following:
• Be sure your borrower can pay back the loan: Don’t just rely on what your broker tells you. Carefully review the borrower’s financial history, to be sure that the borrower can pay back the loan.
• Don’t just go after the highest yield: Don’t invest in high-interest trust deeds just because they offer a higher return on paper. The higher the borrower’s interest payments, the higher the risk of default
• Start small and scale: Begin with small investments as they are less risky. As you do more of these deals and develop your own understanding of the process, you can then begin investing in larger loans.
By employing these strategies, you can avoid the risk of default and enjoy the benefits of trust deed investments.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.© 2016 Level 4 Funding LLC. All Rights Reserved.